BY YAIR MUNDLAK In empirical analysis of data consisting of repeated observations on economic units (time series on a cross section) it is often assumed that the coefficients of the quantitiative variables (slopes) are the same, whereas the coefficients of the qualitative variables (intercepts or effects) vary over units or periods. This is the constant-slope variableintercept framework. In such an analysis an explicit account should be taken of the statistical dependence that exists between the quantitative variables and the effects. It is shown that when this is done, the random effect approach and the fixed effect approach yield the same estimate for the slopes, the "within" estimate. Any matrix combination of the "within" and "between" estimates is generally biased. When the "within" estimate is subject to a relatively large error a minimum mean square error can be applied, as is generally done in regression analysis. Such an estimator is developed here from a somewhat different point of departure. 1 This is a revised and shorter version of [171. At points, reference is made to [171 for more details. This work has been supported by an NSF Grant #SOC73-05374AO1. I have greatly benefited from the insight of Gary Chamberlain in discussions of the model. This, as well as the helpful comments of Zvi Griliches are reflected in the paper.

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Two questions are asked about the relationship between domestic prices and world prices of agricultural commodities: are variations in world prices transmitted to domestic prices, and do these variations in world prices constitute an important component of variations in domestic prices? Domestic prices are regressed on world prices in various forms, taking into account the possible effects of exchange rates and inflation. The empirical analysis is based on data from the Food and Agriculture Organization of the United Nations for 58 countries for 1968-78 and for the countries of the European Community for 1961-85. The results show that most of the variations in world prices are transmitted and that they constitute the dominant component in the variations of domestic prices. Agricultural products are on the whole tradable, and every country trades in some agricultural products. In the absence of intervention it is expected that domestic prices of such products will vary with world prices. It is well known, however, that agriculture is subjected to considerable intervention, which creates a gap between world prices and domestic prices and which generates crosscountry variations in agricultural prices (see, for example,

Labor is the single most important factor in determining determinants of intersectoral migration. One national income. As economies grow, agricultural labor fundamental determinant is income differences across declines as a share of total labor and converges to a level sectors. As such, migration should stop when income of 2 or 3 percent. Off-famn migration facilitates the differences reach a certain level. development of nonagriculture, but historically the Larson and Mundlac provide a method of measuring process spans decades.the level at which intersectoral migration will cease. Larson and Mundlak argue that the pace of the process While there are credible reasons for a permanent is a fundamental outcome of i dynamic equilibrium difference to exist between sectoral incomes, the authors based on expectations of lifetime earnings and the cost of find no empirical evidence of a permanent wedge. migration. The authors present an empirical model of the This papera product of the Commodity Policy and Analysis Unit, International Economics Departmentis part of a larger effort in the department to understand and measure the determinants of econoric growth. The study was funded by the Bank's Research Support Budget under the rcsearch project "Determinants of Agricultural Growth" (RPO 679-03).Copies of this paper are available free from the World Bank, 1819 H Steet NW, Washington, DC 20433. Please contact Jean Jacobson, room R2-07S, extension 33710 (45 pages). February 199S. The Poly Reward, Wokn Paper Sams diunata he xdngs of uw* u pogrs to wwrwa e ex chng of ide abou deopmenst seAn object1woftheseriastoget thefidigs otquky. ec fthe praatisarke lanfslypa ished The papers cy dx xams of te sand s e ueand daccordigly. Th findings6 iburpreadm and cos ar the autborson and sbould not be atribued to the WorldBank its Execut Board ofDirecors or an of its membe coutris

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